UBS downgrades engineers Morgan and Spectris on margin gloom, upgrades Melrose

Shares in engineers were moved markedly by a short but gloomy note on the sector from UBS on Wednesday that said "margins have peaked", with only Melrose Industries receiving an upgrade.

The Swiss bank's ratings on Melrose was lifted to 'buy' from 'neutral', as it downgraded both well-loved Spectris and Morgan Advanced Materials to 'sell' from 'neutral', while Rotork was lowered to 'neutral' from 'buy'.

UBS said the engineering sector's margins have "gone sideways" since 2011 and, though a longer-term pickup is likely, it forecasts a decline in 2015.

"Post 2009, profit levels were flattered by underinvestment and we are returning to the 'norm'. A near-term margin lift is only likely if volume growth accelerates significantly - our analysis suggests very limited leverage if organic sales growth is sub 5%."

With shares in the group of UK blue chip engineers having risen around 8% so far this year, absolute valuations are at or near their peak, UBS noted, although relative valuation and possible merger and acquisition (M&A) activity may still provide some support.

On Melrose, UBS said while company's next deal in its "buy, improve, sell model" may still not be imminent, prospects looked better based on its sector view around the benefits of margin improvement in a slow-growth environment, along with reduced risk from its Brush turbogenerator business. The price target is lifted to £3 from £2.65.

On Spectris, UBS said the consensus forecasts are too high based on "anaemic leading indicators, challenging end markets and poor outlook from peers".

Shares in Melrose were up 2.8% at 10:00 on Wednesday, while Morgan was down 2.5%, Spectris down 2.6%, while Rotork was just south of flat.